Financial Supply Chain & Working Capital Management

by Markus Wohlgeschaffen, Head of Global Trade Finance & Services, UniCredit

hen we look at a successful corporation, the first things we notice are the excellent products and services on offer. On a closer look the less immediately visible aspects, that play a major part in the success of a successful company, become more apparent. A key component is efficient supply and working capital management. Often, despite the development of innovative products, entrepreneurial failure is due to the lack of a sufficient cash flow to finance operations. Both businesses and financial institutions have realised the need to focus on the active

management of working capital and the related financial supply chain management, in the same way as in recent years, corporates have optimised their physical supply chains. According to various studies some 4% of production costs are related to financing costs. With this in mind, and considering that the so-called order-to-live cycles continue to be further extended, there is an increasing tendency to focus on the qualities of an optimised financial supply chain. Buyers are required to increase their payment terms to the maximum as well as to

reduce their stock and inventory, leaving this burden to their suppliers. But not all suppliers, even strategic ones, can manage the request for longer payment terms considering the changed regulatory environments (Basel II & III force banks to differentiate the equity allocation according to the relevant rating of the borrower) and market conditions (the reduced number of banks).

GTB and Trade Purchase

The efficient management of the financial supply chain and working capital is one of the strengths of UniCredits product line Global Transaction Banking (GTB). GTBs product offering has been developed to help UniCredits clients optimise the different elements of their working capital throughout the entire supply chain and deliver successful win-win solutions to the parties involved. Safeguarding ones own liquidity is the key not only to survival during a financial crisis but also to further success; moreover, the support of, active management and cooperation with core suppliers plays an important part in ensuring a constant and

Safeguarding ones own liquidity is the key not only to survival during a financial crisis but also to further success.

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quality-assured supply chain. UniCredit has developed a dedicated product - an internet-based system called Trade Purchase, that automatically links the real supply chain with the money supply. There is a great toolbox offering numerous effects and tailored solutions. Trade Purchase is accessible round the clock: an easy to use, web-based internet solution which enables UniCredit Groups customers an automated and revolving purchase of buyer-accepted invoices at attractive rates. One of our key clients in the automotive sector, a tier-one supplier, recognised the need to increase its working capital management and also to provide as much support as possible to its core suppliers. For this corporation sustainability and reliability are fundamental, and are also reflected in their dealing with suppliers. Many of those suppliers were adversely affected by the financial crisis and the lack of demand in the sector. The company decided to support them by giving them a good rating but the question remained: how to provide the urgently needed liquidity to them without jeopardising the firms own liquidity and/or affecting its own key financial ratios (e.g., increase of debt to equity ratio)? To help the suppliers on one hand, while aiming to optimise its own working capital situation on the other, it was decided to implement a supplier financing model that avoids manual processes and ensures a high degree of flexibility. During the structuring and technical set-up of the transaction, it was a challenge to make sure that the system was able to deal with credit notes and different currencies as well as individual limits for each supplier in order to mitigate or reduce risk to the buyer.. UniCredits final solution to dealing with all the individual, sometimes quite difficult, requirements, was to tailor its Trade Purchase product to the clients specific needs. After the implementation and testing phase the system went live in June this year. The suppliers who are now using the system are satisfied with both the easy-to-use platform and the attractive conditions. As a

The value proposition

The value proposition can be briefly summarised as follows: For the supplier
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Cheaper cost of finance, because based on buyers credit risk Conversion of accounts receivable to cash through attractively priced, true nonrecourse sale Credit lines freed up to capture additional business with lenders Improvement of financial ratios Attractive liquidity management tool via the early payment option No need to provide collateral or the factor with credit information on own company

For the buyer

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Improvement of commercial payment terms (expansion of Days Sales Outstanding) without adding additional costs to the supply chain therefore helps make revision of sales terms more acceptable Improvement of working capital using trade payables without increase of bank indebtedness Improvement of key ratios (e.g., ROI, debt-to-equity, Quick Ratio) Increased loyalty of suppliers and market reputation Active involvement in liquidity management of suppliers Further revenue potential (guarantee fees) for the allocation of own credit risk via irrevocable invoice acceptance towards suppliers

next step, we intend to open the system to a larger number of suppliers across Europe and CEE. The aim is to cover a volume of approximately EUR 600m over the coming months. UniCredit Groups excellent, indepth network will ensure a smooth onboarding process as well as providing an excellent knowledge of local market conditions. Another decisive factor was UniCredits particular strategic approach which

combines state-of-the-art IT with a proficient know-how and a wide network of physical branches. As a result of this, UniCredit not only provides liquidity through the specific supplier finance programme, but also offers additional financial services to the suppliers via its branch network. The clients statement: Within this transaction there are only winners reflects the success UniCredit Group has been able to deliver. n

Markus Wohlgeschaffen Head of Global Trade Finance & Services, UniCredit

Markus Wohlgeschaffen is Head of Global Trade Finance & Services at UniCredit. He is responsible for the commercial trade finance & services and supply chain finance business. Markus has been working in the trade finance sector for 25 years and was previously in charge of trade & payment products as well as the trade finance activities (both commercial and medium- and long-term trade finance products) in Japan and Italy for UniCredit Bank AG (formerly HypoVereinsbank).

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